01—Abstract
Summary
Summary of the 10-K filed March 7, 2012. Cited figures are marked; the original filing is the authoritative source.
First Citizens BancShares (FCNCA) reported 2011 net income of $195.0 milliona, or $18.80 per share, versus $193.0 million ($18.50 per share) in 2010, with return on average assets of 0.92% and return on average equity of 10.77%.
Earnings were heavily supported by FDIC-assisted acquisition gains of $150.4 millionb (from United Western and Colorado Capital Bank), which together with loss-share-related noninterest income made up a large share of profitability. Net interest income rose 12.5% to $871.0 million, driven largely by $319.4 million of discount accretion on acquired loans, which the company itself describes as unpredictable and likely to create volatility in future periods. The filing carries significant caveats.
Management concluded that internal control over financial reporting was NOT effective as of December 31, 2011, due to a material weakness in accounting for acquired loans (ASC 310-30) and the FDIC loss-share receivable; the auditor issued an adverse opinion on ICFR. Credit costs remained elevated: the provision for loan losses rose to $232.3 millionc, net charge-offs on covered loans reached $136.5 million, and nonperforming assets rose to $803.9 million (5.68% of loans, leases and OREO). Covered-asset NPAs were 23.0% of covered assets.
Capital remains strong, with a Tier 1 risk-based ratio of 15.41% and leverage ratio of 9.90%, both well above well-capitalized thresholds. However, investors should note that $243.5 milliond of trust preferred securities will be phased out of Tier 1 capital beginning in 2013 under Dodd-Frank, reducing pro forma Tier 1 leverage to 8.73% if fully eliminated. The company's earnings quality, dependence on future FDIC-assisted deals for acquisition gains, and the open material weakness are the key items for investors to weigh.
02—Key points
Key Highlights
- Net income of $195.0M ($18.80/share) in 2011, up slightly from $193.0M ($18.50/share) in 2010; ROA 0.92%, ROE 10.77%.
- FDIC-assisted acquisition gains of $150.4M in 2011 (United Western $63.5M, Colorado Capital Bank $86.9M), a material share of earnings that management says may not recur.
- Net interest income up 12.5% to $871.0M, but boosted by $319.4M of accretion income on acquired loans, which is unpredictable.
- Provision for loan and lease losses rose to $232.3M (from $143.5M), with covered-loan net charge-offs of $136.5M; nonperforming assets reached $803.9M (5.68% of loans, leases and OREO).
- Material weakness: management and the auditor concluded internal control over financial reporting was not effective at year-end 2011 (adverse ICFR opinion), related to acquired loan accounting and the FDIC receivable.
- Capital ratios strong: Tier 1 risk-based 15.41%, total risk-based 17.27%, leverage 9.90%; but $243.5M of trust preferred securities phase out of Tier 1 starting 2013.
- Dividend held at $1.20/share annually; 2012 quarterly dividend declared at $0.30; 2011 share repurchases of 112,471 Class A and 37,863 Class B shares.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2011filed March 7, 2012Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Interest Expense | $144.19M$195.13M | −26.1% |
| Net Income | $195.03M$193.04M | +1.0% |
| EPS (Basic) | $18.80— | — |
| Shares Outstanding (Basic) | 10.38M10.43M | −0.6% |
05—Questions
Frequently Asked Questions
How much of 2011 earnings came from FDIC-assisted acquisition gains, and is that sustainable?
Acquisition gains were $150.4M pre-tax in 2011, roughly 77% of 2011 net income of $195.0M on a pre-tax-gain basis before taxes. Management explicitly states that these gains depend on the availability of future FDIC-assisted transactions, which cannot be predicted, so they should not be assumed to recur. Excluding them, earnings would have been substantially lower.
What is the material weakness and why does it matter?
Management concluded that internal control over financial reporting was not effective at December 31, 2011, because controls over accounting for acquired loans under ASC 310-30 and the FDIC loss-share receivable failed to prevent or detect errors. Management said prior financial statements were not materially misstated, but the adverse ICFR opinion signals weaker control infrastructure during rapid acquisition-driven growth and remediation is ongoing.
How exposed is the company to credit losses on acquired loans?
Covered loans (acquired under FDIC loss-share agreements) totaled $2.36B, with nonperforming assets of 23.0% of covered assets. The FDIC covers 80% of most losses, but the company still recorded $174.5M of provision for covered loans and $136.5M of covered net charge-offs in 2011, and expects credit costs to remain high in 2012. Loss-share coverage has expiration dates and clawback provisions that could reduce benefits.
How will the Dodd-Frank Act affect the company's capital?
Beginning January 1, 2013, one-third of the $243.5M of trust preferred securities will be excluded from Tier 1 capital each year, with full exclusion by 2015. Management estimates that full elimination would reduce the Tier 1 leverage ratio to 8.73%, Tier 1 risk-based to 13.60%, and total risk-based to 15.46%, which would still be well-capitalized. The company may redeem some of these securities early, which could affect the interest rate swap and liquidity.
06—Continue